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Tuesday, March 26, 2013

Is the Euro the primary culprit?

Hans-Olaf Henkel is a semi-retired, very prominent German with many, many experiences in business and otherwise. Since he has spent much of his career with an American corporation (IBM), his mind is noticeably shaped by common sense.

Henkel tends to swim against German mainstream thought (and he is a strong swimmer!). He has criticized Germany's handling of the Euro-crisis from the beginning. His major argument is that the Euro in its present form is the wrong currency for several countries and the sooner that is recognized and admitted, the better. Henkel is not really in the blame-game. He doesn't praise the North for being so responsible nor blame the South for having been profligate. He simply takes aim at the Euro and analyzes what the Euro has accomplished.

In his latest article, Henkel lists, using the example of Cyprus, 3 points why the Euro is more or less a weapon of mass destruction:

1. 'The anti-German protests in Nicosia help our Euro-savers to hide the consequences of their actions from the public' - These protests create the impression among German voters that their government is successful in protecting German interests (why else would Cypriots protest?). Henkel says the opposite is true. The German government has made things worse through its policies. This is why the German government literally needs the protests from austerity-hit countries to calm down the domestic voters.

2. 'The Euro forces German politicians to poke their noses into domestic affairs of other countries' - When German politicians take influence on the Cypriot pension system, it is not because 'Germans would like to rule the world' but, instead, the Euro drives them to do that. German politicians felt it necessary to tell the Greeks to privatize their national railroad when they would not dare to privatize their own national railroad. They get involved in national tax systems and wage/salary structures. Because they see that as their mission? No, because the Euro forces them to do that. 'A currency which presupposes that, of all countries, Germany gives orders to others cannot promote peace'.

3. 'The result of the Euro can be witnessed on the island of Cyprus. The Turkish part in the North, without the Euro, is doing quite well. The Greek part in the South, with the Euro, is collapsing'.

26 comments:

Yes, he's interesting. I generally avoid reading german eurosceptics because, well, I find them extremely annoying. Full of moralising and finger-wagging about the failures of others, with a romantic view of the glorious past when "we had the Deutschmark".

To put it bluntly, their arguments, while not xenophobic themselves, do tend to argue as an enabler for xenophobia.

But Henkel's arguments are more subtle. He's certainly right that the pictures of protest abroad actually help Merkel domestically.

Although I'm basically pro-Euro (but acknowledge the design flaws), his second point is quite devastating. The "Euroretter" (the EU politicians organising the bailouts) have no option, to stabilise the currency, but to insist on unpopular things, that no government under its own steam would even dream of.

Sometimes, in my more paranoid moods, I think that this was actually the point of monetary union, for its designers. Create a deliberately flawed structure, and let the necessary attempts to correct it create the momentum political union.

Mostly, though, I just think that Mitterand, Kohl and the rest simply couldn't care less about economics.

As he presided over the Maastricht treaty, that created the euro, the French president François Mitterrand is rumored to have said, privately, that yoking Germany to the rest of Europe in this way was sure to lead to imbalances, and the imbalances were certain to lead to some crisis, but by the time the crisis struck he’d be dead and gone—and others would sort it out.

Lewis also reports a conversation with long time euro-septic Wilhelm Nolling - “We entered Maastricht because they had these rules,” he [Nolling] says as we move off to his kitchen and plates heaped with the white asparagus Germans take such pride in growing. “We were talked into this under false pretences. Germans are by and large gullible people. They trust and believe. They like to trust. They like to believe.”

Mitterrand and Kohl were qualified politicians; it's what they both studied and it's what they went on to do. Jacques Delors was principle architect of EMU/Euro, and he went on to become EC President during the design phase. In 2011 Delors conceded that he may have got some things wrong. Delors is an economist.

As EC President, Delors was succeeded by three lawyers - Santer, Prodi & Barroso. I think Delors is the only economist to be appointed as President of the EU, most have been lawyers.

Less than 10% of US Congress members have any training in economics, less than 20% have any background in economics, accounting or business. Phil Gramm is a standout exception, once a Democrat Congressman now a Republican Senator. I doubt the EU is substantially different.

Richard, in my darker moments I wonder if some EU politicians aren't still taking their orders from Moscow. We can be pretty certain that other EU politicians take their orders from Washington/Wall St, because sometimes the orders are transmitted in the clear - publicly and in no uncertain language.

I've been reading Wolf Richter's Cyprus posts, and some of the documents he references, and the IMF country reports for 2011, 2010, 2009 and 2007. Interesting reading. Its a pity the IMF isn't (can't be) more forthright, the writing has been on the wall since before Cyprus even joined the Euro in 2008!

Heard a Russian 'boutique' grain trader on HK radio (an outtake from AJ or RT I forget which) who said he moved his money out of Cyprus months ago. He did not say where to, but from what he said I would not be surprised if it wasn't to somewhere like Montenegro, where he would enjoy some of the benefits of the Euro, without the governance of the Eurogroup.

Yep. I rang my relative in Cyprus months ago too, and suggested the same thing (also buying in preserved food and extra batteries). She thought I was being hysterical, I fear, so I dropped the subject as it was too complicated to explain. It's not just germans that want to trust.

"And the next domino will be? My money's on Slovenia"

Mine too. But I found the whole slow-motion cyprus train-wreck so upsetting, I'm not even going to try and research it. I'll leave that in the - doubtfully competent - hands of those in Brussels.

There is progress. "Too big to fail" has failed, for the first time. And senior unsecured bond-holders are bailed-in, for the first time (too late for Ireland, unfortunately. Not too late for spain). Bank funding costs rise, as a result.

But it's slow progress. And almost nobody understands what's going on. Journalists and politicians included. Not just in Brussels.

Not the Euro is the culprit, the countries sharing it are the culprits.Its like with Communism, its generally a great concept unfortunately it doesn't work well with humans.If everybody would have sticked to the Maastricht criteria we wouldn't be in the mess we are in now. If the member countries would have agreed that the financial data they report can be practically crosschecked by EU offcials no hiding games of deficits would have been possible. If the price of making debts would have stayed in relation to the countries economic situation and not in relation to the EZ mean value, countries would have not been able to pile up debts. This wasn't a failure of the Euro but caused by political interests of each member state of whom all have profitted until 2009 in different ways from the Euro.

The member countries of the EZ have failed to build in the good years a sufficient control system and have failed to equip EU authorities with the necessary rights to control and regulate wrong developments in the member countries. To do so, each member country would have needed to give up big parts of its Sovereinty and none was willing to do so.Germany is with a huge amount of guarantees in the pot, as there is no EU authority strong enough to dictate what would be needed, Germany is trying to do it instead. So far with questionable result.

The first point of Henkel ist thought way to complicated. The people see Greeks and Cypriots running around with swastika symbols and Merkel assaults, so they are simply pissed and will vote for the party with the superficially hardest stance in the issue.

The third part is an astonishingly simple view on things. 2004 in Greece, things were going also quite well. Great growth, raising wages. Even two years ago things in Cyprus where going pretty good as well. Henkel forgets, that the North of Cyprus gets massively pampered by Turkey and even receives EU subsidies. Not to forget the huge amount of soldiers (50.000?) which are a huge economic factor as well.

"If everybody would have sticked (sic) to the Maastricht criteria we wouldn't be in the mess we are in now."

What you basically say is that credit growth in the South should have been sabotaged by an austere fiscal policy.

And what good would that do? I'll tell you. It would cause a depression in the Eurozone much sooner, in the early 00's instead of the early 10's.

The Germans think they were successful in their reforms, but that's not true. The only reason they were successful in their contraction is because others expanded. This little point still eludes them.

It's all about aggregate demand.

The sooner the euro ends, the better. Hopefully, with the new Eurogroup agenda (bail-ins), the people who rejected a return to national currencies (the people who had amassed wealth) are now gonna change their minds, since they're gonna have to contribute for the "rescues".

Hey Jim, thanks for the reply.Germany itself has violated the Maastricht Criteria (around 2003) as it de facto was in depression from the late 90´s until the late middle of the 00´s.

What I basically say isn´t what you got out of it. There have been rules made, all the rules were broken right fromthe start by all involved parties (from Germany over France down to Greece). That´s why the problem in first place is not the Euro, but the fact that all members of the EZ have actively undermined its anyway shaky foundation.

However of course growth solely or mainly based on debts should be avoided. That isn´t sabotage in my eyes but common sense. If that would have caused a recession in Germany than so be it, would have been better than this way round. I think by now every single German screw that went down to Greece the last 10 years is backed up via debts which have been transfered from banks to the hands of the (German) taxpayers.

This crisis isn't about public debt. It is about private debt. Even in Greece, public deficits skyrocketed *only* after private credit started contracting.

So, in a nutshell, adhering to the Maastricht criteria would've solved nothing.

The problem with the euro is threefold: a) the common currency (which amounts to a locked exchange rate) limits rebalancing inside the monetary union, b) the hard currency doesn't suit the needs of the South outside the monetary union, c) it has a renegade central bank that focuses exclusively on the strength of the currency.

Clearly this is unworkable, and I have no idea why they persist.

Better just dissolve the monetary union in an organized manner. The more this persists, the worse the consequences are going to be.

PS - Growth de facto comes through debt. The only issue is whether it's your own debt or somebody else's. Money IS debt, that's how it is, no way around it.

I am a strong supporter of Europe and I until last weeks I was a strong supporter of Eur currency. But the development in Cyprus makes me think again.I am shure at the end they took the best solution possible, but even that is a loose-loose-game. And the feeling of loose-loose-games repeats from Greece, but also in other southern european countries. So I am more and more questioning about the mechanisms that are created by the currency union - are they helpful to unite and friend some countries or are they in contrary more able to divide it.

So I was recommended to read this analyse from July 2012, from a politically questionable, but economically excellent author. It felt for me like being written after Cyprus.

(So please judge on his political track but try to think about his analyses):

Okay, he plays a bit the "Germany pays everything" card but basically he says nothing else than what I wrote above. As soon as one of the criteria of the Maastricht treaty was violated a "political solution" was found to simply bypass it.

I am not in the least impressed by the economic or political analysis of this guy. Very conventional, very German and totally inadequate to the situation.

Why? Well, in the first place it was Germany and France that dismissed the expert recommendations of the convergence criteria, and set their own. They stated (in private) that this was to make sure that countries like Greece and Portugal would enter the eurozone easily.

Secondly, after the relaxed criteria were adopted, it became clear that almost all countries were manipulating their inflation and debt statistical data, because they had problems even with the relaxed criteria. This was known at the time.

Thirdly, even with relaxed criteria and fiddled data, Germany and France were the first to break the rules. For German readers, let me put it this way: the Germans were the first to break the law. Having done so, they decided to just carry on as usual, and not bother with other countries breaking the rules.

Fourthly, it was understood by all economists that there was a problem with the structure of the eurozone. It was a political deal that had very weak economic underpinnings: the slighest shock could send it reeling, and it might not survive more than a few years. Since the shock was actually the massive global financial crisis, it became clear in 2008 that the eurozone countries would need to take quick action to protect the system. They did nothing. I repeat, for Germans: GERMANY DID NOTHING.

Fifthly, specifically on Cyprus, I am informed by German friends that Cypriot banks were pressured into buying Greek bonds, by Germany and by Schauble in particular. If this is correct, then the behaviour of Germany in dealing with the Cypriot banking problem is nothing short of disgusting. Not reprehensible, not unfair: DISGUSTING

Thank both of you for the comments.And I'm thankful for google translate. :-)It was not intended to show the "Germany pays the party"-Attitude. Of course that feeling exists in Germany, and of course that is a main northern european reason for scepticism about currency union.And of course it is true that first Germany and second France broke the Maastricht treaty without beeing punished so the "Box of pandora" has been opened.

My main pouint to quote it was the question: Is it just a problem caused by single misbehaviours (what can be fixed) or do we se a misconstruction of the euro-currency?

1. If the construction should be misconstructed, what would be necessary to repair the euro-currency system?2. would that reforms be realizable, in time and in politics?3. If the repairs are impossible or too expensive - should we better stop the Euro-project soon?4. Helps a single currency to unite european nations or to divide them?

With Question 4, I think the author gave interesting comments about the wars in USSR and Yugoslavia as the only european wars in last 50 Years - Both countries with common currencies, but different languages and people. The currency seems not nessecary to be a "peace-maker" (as I have been expected). And if I actually look to Greece and Cyprus - perhaps it has gone more to a kind of"hate-maker".

For the other points Sebastian Schröder may have met them quite close - thats true. - And personally I am still on the search for the best answers.

But I also start thinking more about how to end the euro-zone-experiment.

1-2. The currency can just survive if the single countries will give away big parts of their sovereinty (financial control) and if the "rich" countries de facto agree to common bonds, shared debts or whatever. To my opinion the trust in EU authorities is way to much damaged to achieve this. The southern countries wants to get rid of the Troika asap and they don´t want to replace that with an even stronger EU comission. France will never give away more sovereinty and Germany will not agree to share debts.

3. We should stop it, but will be quite a desaster. Germany, Netherlands, Luxemburg are with too much guarantees in the pot as to leave the crisis countries from the hook. Dead End Road with no way to stop.

I tend to agree with you. Regretful, because I really did like the idea of a common european currency as a sign of a uniting Europe. But if it make the contrary...

> 1-2. The currency can just survive if the single countries will give away> big parts of their sovereinty (financial control) and if the "rich" countries> de facto agree to common bonds, shared debts or whatever.And for "rich" countries, for agreeing to common bonds, so to carry the depts of other countries, they will demand much more control rights than they carry right now. What meens much more "Berlin dictats", that will be hated by southern countries.

Or, alternatively, we would set in a strong, european president, democratically elected by all the people of the Euro-regions, who has the power to take care about quite a lot of taxes and debts. But as you already said: I also doubt that many european countries (not only france) would accept a strong european president and government, switching even more political power from nations to Brüssel.So I agree with you: It seems to be a Dead End Road.

@ anonymus: Nice joke. Even if the jokes get lame, youmay know they started by the anger about the different opinions how the euro-zone should react. So the source of the hate shown in your pictures was the Euro. Before the Euro there was not such hate.

A serious problem of the german political elite, is that they are emotion-less. I will not use several examples of "mass labeling" a nation and plainly offending it, amongst those that sought help. I will use Italy as an example, which didn't seek german aid and as a matter of fact, is giving aid to countries in trouble, at the same amount as France is.

Right after the italian elections, Steinbruck, said "Italians have voted 2 clowns" (referring to Berlusconi and Grillo). This caused italian president Napoletano, who was en route to Germany, to double back and return to Italy.

These "clowns", were voted by someone (the people). Even if we look past diplomatic courtesy or respect for democracy, comments like that, ultimately reflect to the electorate. It is as saying "You are so dumb, that you vote for clowns". Steinbruck's counterpart on the goverment, Merkel, also never hid her preference to Mario Monti. Accidentally, Monti at the elections went worse than any expectation...

Now put yourself at the position of an italian voter, who reads in newspapers, one day what Merkel says about Monti, the other day what Steinbruck says about Berlusconi and Grillo.

Germany is deluding herself, if thinks that she has an image and popularity problem only in the SE corner of the eurozone. There are cracks and rifts opening between north and south from Cyprus to Portugal and they all see one thing when they look to Germany. And it goes deeper than "poking the nose because of the euro". Even if poking the nose because of the euro was the correct assessment, it's hardly what the southern countries had signed in for more than a decade ago. Or the german nose is really big... Since the same attitude keeps repeating itself in all southern countries, it is apparent that the german politicians are incapable of understanding what's wrong with their "nose".

The majority of the "2nd clown's" voters, Grillo's are age 18-35, who grew disillusioned by the EU dream. And they will be Germany's nemesis.

P.S.: The german author should investigate more, on what was the foundation of the northern cypriot economy in the past 40 years. Hardly connected to the euro or its absence. More connected to the absense of any kind of regulations from anywhere, since it's not recognized state, so everything was "fair game". As a matter of fact, ever since the free circulation between south and north was made, the north, took advantage of it, to become more "legal" and find jobs in the south.

Berlusconi said "culone inchiavabile", in a private telephone, that was illegaly intercepted and divulged. Also, i don't think that you will want to go back and see who started attacking the other first, you will find that he was a habitual mocking target of both german politicians and press for many years.

The german politicians on the other hand, made pubblic statements, during the italian electoral period or immediately afterwards, while awaiting the visit of the italian president of the republic. Hardly the same...

When Grillo will call a name Steinbruck, don't search who offended the other first. It wasn't Grillo.

This isn't about a competition on who "can take it like a man". This has to do with the imperialistic, patronizing attitude of the german politicians, who after declaring which is the lazy, which is the money laundring, who will make referendum and who not, who has low tax and needs to increase it, now will also be judging who gets elected.

If you can't understand it, you will be in for a surprise. One year from now, there are elections for european parliament. The euro-scepticist wing will grow.

Thanks for the reply.Don´t get me wrong, I am living outside of Germany and very often I feel quite ashamed of the dumb talk of German politicians that I have to explain again.However, and this feeling might by totally subjective, I think there is a big difference in the foreign media response if one thing is said by a German politician or by a French or British.

Since decades Germany and Germans are a great target in foreign press, and no stereotype is lame enough to not make it on the first page in the yellow press of certain countries, countries which are the prototypes of Imperialsm by the way. So everybody is allowed to joke on the Germans (espcially the leader of the euro sceptic wing) but the other way round doesn´t work that well as it seems.

For Berlusconi, as he was speaking on a private telephone he probably said what he really thought. However, lets not get into fight about polticians and their dumb talk. There is plenty of it on both sides of the Alps.

"Fifthly, specifically on Cyprus, I am informed by German friends that Cypriot banks were pressured into buying Greek bonds, by Germany and by Schauble in particular. If this is correct, then the behaviour of Germany in dealing with the Cypriot banking problem is nothing short of disgusting. Not reprehensible, not unfair: DISGUSTING"

It's the first I've heard of it. As far as I know, the cypriot and greek banking sectors have been intertwined for a long time, hence the exposure. Also: it's true that Laiki (Popular) bank, after having been taken over by Marfin, decided to aggressively expand in Greece in 2010. And so became extremely heavily exposed. An utterly insane strategy, it has to be said.

Google "Special Report: How a Greek bank infected Cyprus" for more on that at Reuters.

Maybe your German friends slightly misunderstood the information they received? That the banks were encouraged (by Schäuble or others like Ackermann (Deutsche Bank)) to participate in Greek PSI? That would certainly be true. There was a lot of arm-twisting going on behind the scenes, to get the participation up.

And after all, Greece had (correctly) negotiated a recapitalisation of its banks as part of the 2nd bailout, so it made sense for greek banks.Cyprus didn't. As for why they didn't, I'll let the former cypriot central bank head take up the story ...

"Germany does not have the right to decide on the business model for other countries in the EU," Foreign Minister Jean Asselborn told Reuters. "It must not be the case that under the cover of financially technical issues other countries are choked."

"It cannot be that Germany, France and Britain say 'we need financial centres in these three big countries and others must stop'."

Nonsense! Germany has the right to do anything, because "virtuous". From now on Germany will be approving if your growth model is to her liking. Sinners first and no complaints or Purgatory awaits you.

Please, from now on, launder your money only in Germany or german-approved countries!

"It must not be the case that under the cover of financially technical issues other countries are choked."

Yes. Luxembourg up at Banking assets at 21xGDP naturally feels threatened. But don't overdo it. The decision to cut Emergency Liquidity Assistance to Popular (Laiki) and Bank of Cyprus needed to be passed by a 2/3rds majority in ECB governing council. And in that council, every member-state has an equal vote.

That really does say how bad the cypriot banks' situation was. And just how badly the cypriot politicians handled the negotiations.

"Nonsense! Germany has the right to do anything, because "virtuous"."

The trouble is, germany (and I suspect, austria, switzerland, netherlands) have a particular cultural attitude to banking, and structure their banks and their regulators accordingly. In german, this is known as "Ordnungspolitik". And it doesn't translate well. And all the economic theorists about it (the "Ordoliberals" / Freiberg School) are never translated. And the issues are highly technical.

Ordoliberalism has more of a "moral" influence in it than most schools of economic thinking. I suspect that's one reason it's never translated. Most people wouldn't even consider it as economics.

That joke by Monti? "For Germans, economics is a branch of moral philosophy?". He wasn't actually joking, I'm afraid.

It's true. And they're catastrophically bad at explaining it in a political context, because it's technical.

Yes sir, shocking as it may be, Luxemburg (as well as other tiny states inside and outside Europe), doesn't live making cars. The difference is, that nobody appointed Merkel empress of Europe, to say what model a country must follow. Nobody in Luxemburg voted Merkel. It's already enough that in all key europe positions "germany approved" officials are appointed and those that dare say an opposite opinion are simply ignored de facto (Barroso). What happened to the EU decision of last summer (that Monti passed by veto)? De facto de-activated.

The FIAT CEO would very much want to tell Germany that they produce too many cars and to make the game more fair they should reduce them to allow more fair competition to others, but of course doesn't.

It only comes to show the wisdom of Great Britain that stayed out of the euro. What is Britain living from today? No surprise when Cameron rebelled against the propose eu-wide tax on financial transactions. I bet if Britain was small, you would hear a german official come out and say "Britain is too much dependent on financial services, this model has died". Luckily they are outside the euro and they are big.

I don't know about Ordungspolitik and the "morality" of banking. I know this. Try to find Germany, the "virtuous", with the "moral" banking.

http://index.baselgovernance.org/Index.html#ranking

Are you aware of a EU directive, according to which, a company that is found bribing, should be automatically excluded from all bids EU-wide? Siemens should be the first, but who dares to? The German courts (which one would expect aren't as bad as greek ones), didn't even ask to WHO they gave the bribes. A fine and all is ok.

More than "moral philosophy", it sounds like the puritans that during day were accusing prostitution and during the night they were the first on queue to the brothels. But of course, nobody says "corruptor like a German", because nobody has the mediatic power of the Germans. You become "lazy as a Greek", "money laundring like Cyprus", "bubble investor as Spain", but no, Germany is based on morality.

What I can understand from the viewpoint of the FIAT CEO and maybe even from Peugeot or Citroen point of view is that the market share of cars produced under german control is defintively frightening. Beneath the known german brands also Skoda, Seat, Mini, Bentley, Lamborghini belong to German companies, even Ducati belongs to Audi now.But if VW starts to build less cars who secures that the people will buy FIAT and not a Toyota or Kia? Isn´t that something the EU should keep its fingers out? Quotes for cars? Then we need also import taxes on foreign cars. They already created a mess in the agriculture sector with quotes and nonsense subsidies.

Siemens actually did not just pay a simple fee. It paid one of the highest fees ever paid to the EU, it had to build up an anti corruption department (which employs now 600 people)and had to endure plenty of checks to stay in the market. The exclusion would have been just for public bids by the way.In Greece they paid a record breaking fee, agreed to keep all people in job in Greece and I think had to agree on builidng some stuff of the metro for free. Not sure about the last part. All that just to stay in the business, and I am pretty sure if they would have published only one name they would not have found an agreement...

However the two managers responsible for the scandals in Greece (Karavelas, Christofarakos) where sentenced in Munich. I would agree with you that this was a kind of protective trial, as there as agreement that no one can be sentenced for the same thing in two different countries.

Furthermore for the impression you have about that Germans think they are morally superior or something, you should consider the fact that the extract they present you in Greek or foreign media is somewhat like the extract they present in the German media vice versa. In german media you see continously striking people holding up signs with swastika and assaults against Merkel. Of course those people exist, but it isn´t really a majority. Of course there a dumb polticians in Germany, and what do you think they present in the Greek media at Trangas at Lazopoulos? The calm an analytic guy or the guy the delivers an easy headline and a good joke? Media is always biased in a way.It is the duty of everbody in Europe to take a look behind the daily extract we get presented from media that is mostly following its own Agenda.

In Greece they actually *didn't* pay any fee, at the behest of the German "technical advisors" that came to Greece. Instead, Siemens agreed to provide a maintenance contract worth between 100-200Μ €.

The damages caused by Siemens corruption were estimated at 2B €. Let me rephrase that: Siemens will pay 0.1-0.2B € over a period of several years for the maintenance of existing facilities, instead of the 2Β € it owes.

John Mauldin has comments about European banks in his last newsletter which blow one's mind. I thought I had already been critical enough when pointing out that Deutsche's leverage was 40:1. Read John Mauldin and you will want to withdraw all your deposits from any European bank...